Please learn from our mistakes

No-bullshit lessons in business and careers. One mail every day. 15k+ readers love it. Join in?

Oops! Something went wrong while submitting the form.
18 Jul

The First Principles of Wealth — Part 2: Energy and Entropy

Building on the first part of our series, where we established knowledge as the bedrock of wealth, let me now discuss another critical aspect of wealth creation:


If knowledge provides the blueprint for wealth creation, energy is the fuel that powers the process. Every product or service we use, from the smartphone in our pockets to the cars we drive and the homes we live in, is a crystallization of energy, employed towards a useful end.

But when we talk about energy and its usefulness, is also impossible to not talk about the Second Law of Thermodynamics:


Entropy is closely related to how useful or “available” energy is in a system.

The concept is often discussed in the context of the second law of thermodynamics, which essentially says that the total entropy, or disorder, in a closed system will always increase over time.

Now, disorder is quite a vague or tricky thing to wrap your head around, as it could take on different definitions based on the context.But in the context of energy, a key part of this is the idea that as entropy increases, the amount of energy available for work in a system decreases.

To put it simply, the concept of entropy is tied to the idea of energy ‘quality.’ Not all energy is created equal in terms of its ability to do useful work. High-quality energy is organized and concentrated, such as in the bonds of a glucose molecule or the potential energy of water behind a dam, or the energy we receive from the sun. This energy can be easily used to perform work.

As we use this energy and entropy increases, we end up with more dispersed, disorganized energy that is less capable of doing useful work — it's low-quality energy.

To understand this, consider the example of a car engine.

It runs on the chemical energy contained within gasoline. When you ignite the gasoline, it triggers a chemical reaction that releases this energy, which is then used to move the pistons, turn the wheels, and propel the car forward — it's doing useful work.

But not all of the energy from the gasoline is used for this purpose. A significant portion is lost as waste heat, which is released into the surrounding environment. This waste heat is still energy, but it's now in a more disordered, less useful form — it has high entropy. We cannot easily use this waste heat to do work, such as moving the car.

The core idea is this: as entropy increases, the amount of energy available to do useful work in the system decreases.

To create wealth, we want to minimize entropy increases (energy loss) to maximize the amount of work we can get out of a given amount of energy. This is a critical aspect of wealth creation because the more efficiently we can use energy, the more value we can generate from it.

This becomes evident when we consider the industrial revolution — a historical inflection point of unprecedented wealth creation. This era saw the conversion of raw power, primarily from coal, into mechanized work.

You see, there was always latent useful energy in coal, which up until the creation of the steam engine, wasn't available to do useful work. But with the steam engine, we could now extract that unused potential and employ it towards useful outcomes.

Now conventionally, the second law of thermodynamics is often phrased as “entropy always increases.”

But a more nuanced interpretation is that the total entropy of the universe as a whole will not decrease; it is statistically likely to always increase with time. But this doesn't mean that entropy can't decrease locally! In fact, all of life is proof of entropy decreasing locally while it increases universally.

All living systems maintain lower entropy states (i.e., highly complex and ordered structures) by taking in free energy from their environment in the form of food or sunlight, and expelling higher entropy waste. This results in an overall increase in entropy in the universe, even though the organism itself is constantly maintaining a state of lower entropy by harnessing useful energy from its environment.

Let's once again consider the car in our previous example.

First, there are raw materials: iron ore, rubber trees, crude oil, bauxite (for aluminium), etc. Each of these is a system with a certain level of entropy — relatively low, because they're relatively simple and uniform substances.

But in the context of usefulness, they are in a pretty disordered or high entropy state.

To turn them into something useful like a car, we need to increase the complexity of these substances significantly. The iron ore must be processed into steel, which is then machined into engine blocks, frames, and body panels. The rubber must be processed and formed into tires. The crude oil must be refined into various types of fuel and lubricant, and also into plastics. Bauxite must be refined into aluminium, then formed into other parts of the car.

Each of these processes requires an input of energy: to run the machines, to heat the materials, to drive chemical reactions, etc. This energy typically comes from burning fossil fuels or using electricity (often generated by burning fossil fuels, though increasingly from renewable sources).

As the energy is used, it's converted into less useful forms (like heat), and it disperses into the environment, which increases the overall entropy of the universe. However, within the confines of the manufacturing process, the entropy is decreasing: raw, disordered materials are being turned into highly ordered car parts meant for a specific purpose, with a specific goal in mind.

Then, there's the assembly of the car itself.

Again, this is a process that requires energy, and which decreases entropy: a pile of car parts is much more disordered than a fully assembled car. And again, the use of energy in this process increases the entropy of the universe overall.

Once the car is assembled, it's transported to a dealer, which again requires energy (increasing overall entropy), but which decreases entropy in a small way: a car on a dealer's lot is in a more 'ordered' state, from a human perspective, than a car in a factory hundreds of miles away.

So, when we say something is more “ordered” or in a state of lower entropy, we mean that it is more predictable and useful to us as a system.

And when we say something is “disordered” or in a state of high entropy, we mean that we cannot employ it to produce useful outcomes for us.

When a complex product is manufactured from simpler elements, free energy is utilized to decrease the entropy of the system — the manufactured product — at the cost of an overall increase in entropy elsewhere, like loss of heat in the energy source. This kind of “entropy trade-off” is fundamental to the functioning of complex systems, be they biological organisms, machines, or economies.

For a different example, consider logistics services like FedEx or Delhivery.

These businesses are excellent examples of systems that decrease entropy through the use of energy, increasing order in the process.

When you send a package through a logistics service, the package represents a sort of “disorder” from the perspective of the global distribution system. It's a single, isolated item that needs to get from point A to point B, amidst millions of other items with different origins and destinations. The task of the logistics service is to reduce the entropy of this system — to bring order to the chaos.

Let's consider a package being sent from Mumbai to Delhi.

Initially, the package is picked up from the sender's location by a delivery person, who's driving a route that includes many other pickups and deliveries. The delivery person's route is carefully optimized to minimize the amount of driving (and therefore, the amount of energy used) while still picking up and delivering all packages on time.

The package is then taken to a sorting facility, where it's grouped with other packages going in the same general direction. This is another decrease in entropy: instead of a random assortment of packages, we now have an organized group, all headed north.

The sorted packages are then loaded onto a truck or airplane, again according to an optimized plan that minimizes the amount of energy used. The truck or plane then takes the packages to another sorting facility in Delhi, where the process is reversed: the packages are sorted by delivery route, loaded onto delivery vehicles, and finally delivered to their recipients.

At each step of this process, energy is used to reduce the entropy of the system. The energy comes from the fuel used by the trucks and planes, the electricity used by the sorting facilities, and even the food eaten by the workers.

As this energy is used, it increases the overall entropy of the universe (mostly by being converted into waste heat). But within the confines of the logistics system, the entropy is decreasing: disordered packages are being turned into ordered deliveries.

In the end, it is this use of energy to decrease entropy within this system (i.e., to get packages from their senders to their recipients efficiently) that creates the value that logistics services provide. And it's also what allows these services to be part of the larger economy, which — as we discussed in the previous sections — is all about using energy to reduce entropy and create order.

Because consider the alternative: where every individual who wishes to send a package to Delhi uses a personal mode of transportation to carry the package to Delhi. Cumulatively, it would be orders of magnitude more inefficient than a centralized service like Delhivery, which is operationalizing and bringing efficiency to the whole process, at scale.

But it’s not enough to simply have energy.

What matters more is the efficiency with which we can harness and utilize it. This is where knowledge and know-how come into the picture — something we discussed in Part 1 of this series.

Energy is essentially what drives the process of crystallizing knowledge and know-how into wealth. And to put it the other way around, knowledge and know-how are what instruct the process of employing energy to produce useful work.

Consequently, a knowledge worker can be viewed as a system trying to minimize “surprise”.

Because just think about what a knowledge-worker does:

Be it a scientist, engineer, doctor, lawyer, designer, or writers — a knowledge worker is never in a static state, working within a bounded system where all the rules are known. Instead, they're continually acquiring new information, forming new ideas, and refining their understanding of the world — using it to anticipate better, predict better, manage risk and uncertainty better, and most importantly, adjusting their models in response to new observations and experiences.

By learning new skills, mastering new tools, and synthesizing insights from various disciplines, knowledge workers actively shape the world, or at least their immediate professional environment. Through their creative and intellectual output, they make the world more predictable and useful.

A software engineer writing code to solve a problem, a financial analyst forecasting market trends, a scientist working on devising an effective cure for a disease, a marketer trying to optimize her ad spend, or a journalist crafting a narrative to explain a complex issue — these are all examples of knowledge workers using energy to minimize the entropy of their respective systems.

By transforming their knowledge into tangible and useful outcomes, they're effectively minimizing “surprise” for the benefit of the collective.

Whether it's a piece of software, a research report, or an investigative article, these outputs represent wealth in a knowledge-driven economy. They are instances of knowledge crystallized into products or services, which are then traded in the marketplace, contributing to our collective know-how, efficacy in dealing with problems, and consequently, our economic growth.

This is fundamentally how a worker who purely works with information uses energy to create wealth — by arriving at better explanations for phenomena. These explanations help improve our understanding of the particular system we operate within and help us achieve more with less.

As such, your capacity to create wealth as a knowledge worker can be seen as a function of your ability to accurately model the world, to minimize surprise through learning and action, and to transform your knowledge and know-how into something useful for the collective.

And as for the inputs the best knowledge workers today demand to employ their intellect to produce useful outcomes, the primary input is Capital — something we'll explore from first principles in Part 3.

Feeling Lucky?
Subscribe to get new posts emailed to you, daily. No spam.
Oops! Something went wrong while submitting the form.
15k+ business professionals act on our advice every day. You should too.
Subscribe to get new posts emailed to you, daily. No spam.
Oops! Something went wrong while submitting the form.
15k+ business professionals act on our advice every day. You should too.